Queensland Major Projects Pipeline

Queensland Major Projects Pipeline

Queensland Major Projects Pipeline

A JOINT INITIATIVE OF THE QMCA, CSQ AND IAQ Queensland Major Projects Pipeline

Queensland Major Projects Pipeline

Total $39.9b Unlikely Prospective Major Projects Pipeline – Breakdown $39.9 billion total (over 5 years) Credibly proposed 33 $6.9b $5.1b $4.1b 43 22 projects valued at projects valued at projects valued at Unfunded $16.1 billion Public Projects $20.2b Private Projects $19.7b Major project activity Funding split Total Pipeline Value $39.9b AT A GLANCE

Queensland Major Projects Pipeline

Major Projects Jobs Announced Under construction Under procurement 22 $5.3b $4.1b $14.4b 12 58 projects valued at projects valued at projects valued at Funded $23.8 billion South East Queensland Surat Basin $13.6b North Queensland $8.2b $3.8b Various 14.3b Fully-funding the pipeline will support an extra 4,700 workers each year on average The funded pipeline will support 12,700 workers each year on average per year per week per working hour per day $21m $2.1m $152m Scale of Recurring Expenditure $7.9b

Queensland Major Projects Pipeline
  • CONTENTS Foreword
  • 1 Executive Summary
  • 2 Long-term Challenges and Recommendations
  • 5 Economic Outlook
  • 10 Long-term Queensland Major Projects Pipeline
  • 24 Workforce and Employment Outlook
  • 38 Implications, Challenges and Risks
  • 46 Conclusion and Recommendations
  • 60 2018 Major Projects List
  • 64 This report has been produced by the QMCA, CSQ and IAQ (“the Industry Bodies”) with the assistance of BIS Oxford Economics. The report is based on information available as at end March 2018 from public and private sources including Project Sponsors and the Industry Bodies, Project Sponsors and BIS Oxford Economics provide no warranty as to its accuracy, reliability or completeness. To the extent permitted by law, neither the Industry Bodies, Project Sponsors or BIS Oxford Economics or any of their related entities accept liability to any person for loss or damage arising from the use of the information contained in this report.
Queensland Major Projects Pipeline

FOREWORD Nowhere else in Australia do industry peak bodies consult so closely with governments, government-owned corporations and private sector proponents to accurately chart the status of all major projects in their home state. The fruit of this approach is an authoritative report which describes the scale, timing and location of all major engineering projects being considered or developed in Queensland. Sincere thanks to our partner BIS-Oxford Economics for their expert guidance, compilation of the project listings and the detailed independent analysis that underpins the report. This year, we have increased our investment in the report format to enhance reading experience and improve access to key report data through a dedicated website.

The new design and look of this report is a statement of confidence in the future of our partnership and the continued relevance of our report to industry for years to come.

For infrastructure designers, contractors and other project participants, this report is an indispensable business planning tool, capable of guiding well-informed decisions to participate in chosen market sectors and geographic regions. For governments, the consolidated picture of state wide major project activity in the next four years can help guide policy formation, unlock the potential for private sector partnerships and leverage capital works investment. The greatest threats to a sustainable pipeline of projects are the identification of investable projects, availability of funds and timely investment decisions.

This year’s report highlights much lower levels of private sector investment than previous years, with $9.4 billion of projects classified as only prospective or considered unlikely to receive funding. Until positive business cases and investment decisions are made, mining and industrial projects such as those in the undeveloped Galilee Basin remain at risk. The value of public sector projects which have positive funding announcements or are currently under procurement outstrips the private sector. The report also forecasts a significant 72% reduction in private sector mining and heavy industry projects in the next five years compared to the last.

The ability of governments to identify and deliver on their planned infrastructure has therefore assumed even greater importance to the continued shortterm sustainability of the major projects contracting sector.

Queensland is a decentralised and vast Australian state which requires continued investment in infrastructure by both public and private sectors to meet demands of a growing population and increase our global competitiveness. Experience from successful countries and jurisdictions around the world show that when public and private sectors face infrastructure challenges together, the public and economy are the big winners. Perhaps the real worth of our report is that it sends a strong signal to potential infrastructure investors that a highly motivated engineering sector exists, with contractors and service providers eminently capable of preparing for and delivering world class major projects.

As industry peak bodies we are committed to promoting Queensland as a world leading destination for economic development and new infrastructure investment. We look forward to working with all our stakeholders in 2018 to grow the pipeline of major projects in our great State. We are proud to introduce the 2018 Queensland Major Projects Pipeline Report to you – an initiative of the Queensland Major Contractors Association (QMCA), Construction Skills Queensland (CSQ) and the Infrastructure Association of Queensland (IAQ). Peter Anusas President Queensland Major Contractors Association Brett Schimming Chief Executive Officer Construction Skills Queensland Steve Abson Chief Executive Officer Infrastructure Association of Queensland 1 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

Queensland Major Projects Pipeline

EXECUTIVE SUMMARY Welcome to the second Queensland Major Projects Pipeline Report (the Report) developed by the Queensland Major Contractors Association (QMCA), Construction Skills Queensland (CSQ) and the Infrastructure Association of Queensland (IAQ). During this period, Queensland experienced a substantial boom and bust cycle in construction activity and major project work. The key finding of this Report is that major project work has risen by 58% in 2017/2018 to $6.9 billion after two successive years of low activity. Subject to level of funding commitments for 22 credibly proposed projects, activity in 2018/2019 is forecast to be retained at a similar level.

However, recovery in activity may be short-lived and decline again in 2019/2020 due to an identified lack of viable replacement projects. Maintaining recent momentum is therefore the core challenge facing the state, requiring a range of initiatives to improve levels of funding for infrastructure, ensure capability and capacity to manage a growing pipeline and, fundamentally, provide positive conditions and frameworks that support the economy’s growth engines: public and private investment. Given rising major project activity in other states, and the need to provide infrastructure to meet growing demand in Queensland, governments need to consider how they can raise additional funding for infrastructure projects, accelerate existing projects or stimulate private investment.

Maintaining a stable and mildly growing pipeline of major project work from here will not only support economic growth and the sustainability of the major projects industry, but importantly will likely cost the government much less than if the projects were undertaken later in the cycle or in a more heated environment. Industry can feel more confident about investing in new equipment, productivity enhancing initiatives and skills development if they are given reasonable lead times to prepare in the form of a clear, long-term major projects pipeline – and if governments and procuring agencies implement supportive policies.

This year’s Report provides a comprehensive list of major project work, together with analysis on the corresponding level of construction activity this entails and the subsequent demand for skilled construction labour. This analysis is based on both the completion of existing projects and the likelihood of potential projects proceeding. A complete list of major projects considered for this analysis, and the explicit assumptions for each project regarding work done and construction workforces employed each year, are provided in the Appendix at the end of this report. As well as presenting the pipeline, the Report discusses the key economic settings where major project activity is taking place, for Queensland and Australia, together with global trends.

Given rising major project activity in other states and the need to meet growing demand in Queensland, governments need to consider how they can raise additional funding for infrastructure projects, accelerate existing projects or stimulate private investment 2 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Queensland Major Projects Pipeline

KEY FINDINGS — The total value of 190 projects identified in the 2018 pipeline is $39.9 billion (Engineering Value), compared to 166 projects valued at $39.1 billion in the 2017 pipeline. However, the value of funded work in the pipeline is only $23.8 billion, with 98 public and private projects still awaiting funding commitments. — Northern Queensland has the strongest growth prospects in the pipeline for all regions (including funded and unfunded work) compared to the past five years, but South East Queensland still commands the largest share of major projects activity (Figure 3).

New public and private investment – including projects in the Major Projects Pipeline – is having a broader, stimulatory effect on the Queensland economy.

Queensland still lags New South Wales and Victoria in terms of funding and delivering infrastructure. As New South Wales and Victoria further ramp up infrastructure investment over the remainder of this decade, challenges may re-emerge in procuring construction services in Queensland. This is a challenge that will be compounded not only by digital disruption but by Queensland’s and Australia’s changing demographics – and in particular the ageing of the workforce, as identified in the workforce implications section of the Report.

Public and private sector investment – focused in roads, rail, telecoms and electricity – is driving the current recovery in major project work. — While major project activity has risen from the 2016-2017 trough – the main challenge will be keeping activity at sustainable levels into the future given the weak outlook for currently funded work (Figure 1). — The value of public sector projects that have funds committed or are currently under procurement now outstrip the private sector by a factor of 6 to 1. The ability of governments to identify and deliver on their planned infrastructure has therefore assumed even greater importance to the continued short-term sustainability of the major projects contracting sector.

17% of the overall project pipeline ($6.9B) is unlikely to proceed 3 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

Queensland Major Projects Pipeline

Figure 1 Major Projects Work Done: All Segments 2 4 6 8 10 12 14 16 18 20 Funded $ Billions Total Credibly Proposed Total Prospective Total Unlikely % of Public Funding (RHS) 2010/11 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 2011/12 0% 10% 20% 30% 40% 50% 60% Figure 2 – Outlook by Sector Total Pipeline of Work Over the Next Five Years 0 2,000 4,000 6,000 8,000 10,000 12,000 Mining & heavy Industry Roads & Bridges Rail & Habours Non-Water Utilities Water & Sewerage Defence Funded Unfunded Compared to Previous Five Years (% Change) % N/A 42% 129% 85% 77% -72% Funded Not Funded -96% -12% N/A 361% 0 3,000 6,000 9,000 12,000 15,000 South East Queensland Surat Northern Queensland Galilee Bowen Gladstone -52% 167% Compared to Previous Five Years (% Change) % Figure 3 Outlook by Region Over the Next Five Years The total value of 190 projects identified in the 2018 pipeline is $39.9b 4 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Queensland Major Projects Pipeline

LONG-TERM CHALLENGES AND RECOMMENDATIONS While investment in major engineering projects has improved in Queensland, the general outlook for growth in investment, employment and the broader economy is not exactly spectacular. Rather than the high growth rates experienced during much of the 1990s and 2000s, economic growth (as captured by Gross State Product or GSP) is expected to average around 2.8% per annum through the next five years, with Queensland State Final Demand (SFD) growth averaging a slightly better 3.3% per annum. Historically, Queensland has significantly outperformed the Australian economy, however the next five years only sees very marginal outperformance overall.

It’s unsurprising that there is a correlation between major project work done and Queensland’s economic performance – with the latter represented by growth in SFD and GSP. Major project work has strong multiplier impacts on the economy, particularly when it uses local labour and resources. Essentially, additional major project work requires other industries to boost their outputs also – both directly to service the initial increase in construction output, and then indirectly to satisfy the subsequent expansion in the other industries. The overall gross multiplier (or total direct requirement) for heavy and civil engineering construction is over two, suggesting that every dollar increase in major project work “requires” an overall boost of over two dollars across the broader economy.

Apart from the short-term impacts, investment in critical infrastructure major projects can also boost longrun economic growth by improving productivity (e.g. reducing transport times and costs). This boosts the economy’s “speed limit” before it runs back into capacity constraints. Overall, sustaining growth in the Queensland economy requires putting into place plans and policies that will encourage and sustain both public and private investment in the state over the long-term. This means addressing funding issues highlighted in the 2017 Major Projects Pipeline Report, continuing to develop new productive infrastructure projects, and providing a supportive environment for privately funded projects to proceed.

Figure 4 Major Project Work Done and Queensland State Economic Performance 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 2010/11 Not Funded Funded 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 2021/22 -4 -2 2 4 6 8 10 SFD A%ch GSP A%ch 5 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

There has been a 64% reduction in credibly proposed projects from $11.5 billion identified in our 2017 Report to just $4.1billion in this year’s Report, which indicates challenges to sustaining major project work at 2017/2018 levels over the next two years.

In the short-term, funding for $4.1 billion of credibly proposed projects is required and detailed business cases are needed to further support $5 billion of prospective project investment decisions. Over half of the private sector projects identified in the Pipeline are either Prospective or unlikely to receive funding approval in the medium term. This is leading to a distinct lack of replacement projects for those currently under construction and is skewing the investable project ratio towards public sector projects. The challenge is to understand the barriers that are preventing greater private investment in existing or new private infrastructure – be that regulation, approvals, risk on financial return, perception of sovereign risk or confidence in the long-term outlook for the region.

Meeting the infrastructure challenge requires all levels of government to develop policies that align their infrastructure priorities and streamline approval of their project funding co-contributions. This is particularly important in Queensland as the split in policy between Commonwealth and State on long-term asset leasing and capital recycling means using this option to raise infrastructure funding is not possible in the medium term, unlike the high-growth states of New South Wales and Victoria. Policies are also required that encourage private sector proponents to invest in their existing infrastructure while attracting new investment to Queensland.

Port Drive upgrade Encourage the adoption of new technologies that increase the productivity of the construction industry 6 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

There are initiatives that governments can undertake to boost their funding capability and deliver the infrastructure Queensland requires, including: —Continue to mature the development of independently prepared business cases and ensure that public infrastructure projects are selected through transparent cost benefit analysis (CBA). To ensure continued regional investment, regional projects in existing areas or networks with low populations or relatively low initial demand may require more careful consideration of business case benefit-costratios of less than 1, taking a longer term and wider view of the project benefits.

Improve identification of specific markets, networks or regions where privately-led infrastructure proposals can provide critical infrastructure. For different reasons, the State-sponsored Market-led Proposal initiative and the Commonwealth-sponsored Northern Australia Infrastructure Facility initiative have yet to stimulate substantial increased economic investment and major project activity. Rather than await proposals, the formulation of specific prospectus by government that invite interest in developing desirable infrastructure may assist both international and domestic private investors to actively participate.

Provide increased certainty of long-term Commonwealth funding streams through expanding the number of City Deals. The Townsville City Deal struck in December 2016 was the first in Australia and an important start. A South East Queensland (SEQ) Regional City Deal has the potential to be the foremost City Deal in the nation involving eleven separate Councils. This second generation City Deal can provide a structured, coordinated plan for the long-term funding of SEQ infrastructure by all tiers of government.

Research, identify and work to remove barriers to private sector infrastructure investment.

The current value of funded private sector projects announced or being procured is less than 20% than those funded by the public sector. This indicates a significant skew from the historical average of 50-50 public-private investment in major engineering projects. —Do not rule out infrastructure debt for capital investment. In the right circumstance where productive economic infrastructure is identified through an independent business case, increased debt funding can have a powerful impact on economic growth. —Provide increased certainty of Commonwealth and State contributions to funding of transport projects on the National Land Transport Network.

Since last year’s Report, there have been further public disagreements by the respective governments on major contributions towards funding major projects on the M1 motorway and Cross River Rail. This decreases confidence and leads to uncertainty of the transport projects in the Pipeline. —Maintain strong oversight and monitoring of government capital works expenditure and breaking the underspend pattern on planned infrastructure investment. As highlighted in the previous Report, there continues to be sharp differences in planned public investment (measured as ‘purchases of non-financial assets’ in various Budgets) and actual spending outcomes.

The 2016/17 State Budget, for example, planned for $8.3 billion in such investment, which the recent 2017 Mid-Year Fiscal and Economic Review (MYFER) confirmed to be $7.3 billion – around a $1 billion shortfall. 7 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

The existence of a highly skilled and efficient engineering and contracting market in Queensland can help to stretch tax-payer funds and attract private sector proponents looking to develop low-cost infrastructure and exploit global markets. For these reasons governments, private sector proponents and major project participants could collectively explore how to drive out waste, improve productivity and improve project risk allocation through the following: —Utilise accurate capital planning, state infrastructure plans and long-term project pipelines such as in this Report to give industry the best possible chance of participating in major projects.

Develop and maintain a plan for construction materials so that the demand and supply balance for scarce products can be quantified, mapped and emerging gaps identified early in the process. Similarly, attention needs to be focused on the development and maintenance of a construction transport and logistics plan to avoid bottlenecks, delays and rising costs for construction materials as a result of congested road transport networks. —Increase collaboration between infrastructure developers and the construction industry, through the use of contract forms that seek to maximise value through reduction in waste, reward innovation, lead to genuine improvements in productivity and best allocate risk.

Increase efficiency in procurement of infrastructure projects through use of more selective and collaborative tender processes that recognise the significant cost involved in bidding for large infrastructure projects (costs that ultimately need to be recovered either through direct reimbursement or mark-up). —Encourage the adoption of new technologies that increase the productivity of the construction industry. These can include offsite modular construction, automation, digitisation, use of Building Information Modelling (BIM) to enhance supply chain collaboration and investigate better forms of knowledge transfer.

Strengthen the focus on workforce planning and skills development initiatives so that demand for key onsite skills can meet the infrastructure activity. —Encourage the development of formal dispute avoidance strategies that include the use of effective collaboration to develop construction price certainty and allocate project risk using best practice. Logan Enhancement Project 8 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

9 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

ECONOMIC OUTLOOK Differences in the timing and magnitude of investment cycles by region are creating large differences in economic performance (and construction activity) by state Further declines in bulk commodity prices are anticipated, before a longer term recovery, affecting Queensland royalty revenues Population growth is among the highest of the developed economies, which has helped underpin household consumption and demand for dwelling and infrastructure construction 10 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Unlikely Prospective Public Sector Pipeline $20.2 billion total (over 5 years) Credibly proposed 11 $0.5b $2.0b $2.2b 18 13 projects valued at projects valued at projects valued at Announced Under construction Under procurement 17 $4.7b $3.4b $7.4b 8 24 projects valued at projects valued at projects valued at Unfunded $4.7 billion Funded $15.5 billion Unlikely Prospective Private Pipeline $19.7 billion total (over 5 years) Credibly proposed 21 $6.4b $3b $1.9b 26 9 projects valued at projects valued at projects valued at Announced Under construction Under procurement 5 $0.7b $0.7b $6.9b 4 34 projects valued at projects valued at projects valued at Unfunded $11.4 billion Funded $8.3 billion 11 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

ECONOMIC OUTLOOK The Queensland economy has traditionally been one of the stronger state performers in Australia but has been suffering the effects of a prolonged downturn in public and private investment. While one of Australia’s key ‘resources’ states – and one of the largest exporters of coal (and now gas) – the State economy remains highly diversified and increasingly linked into global trade networks through tourism, agriculture and education industries. Mining investment is at a trough and rising non-mining investment and service credits will help offset expected falls in private dwelling investment.

Key points: — Global economic growth is predicted to strengthen in 2018, before moderating in the longer run. World Gross Domestic Product (GDP) growth has risen from 3.2% in calendar 2016 to 3.7% in 2017 and is forecast to rise to 3.9% in 2018. From 2019, the world economy will begin to show gradually slower growth, linked to long-term fundamentals, with growth forecast to average 3.3% over the five years to 2027. — Queensland State Final Demand (SFD) rose in 2016/17 after two years of decline. Over the past year, growth in SFD has been underpinned by modest growth and contributions from household spending, business equipment purchases, government recurrent expenditure and dwelling investment, although growth in dwelling investment has slowed sharply over recent quarters after strong growth over the previous four years.

Global prices for a number of commodities are expected to retreat over 2018, before slowly recovering over subsequent years as the global oversupply in a number of commodities dissipates. Bulk commodity (coking coal and iron ore) prices rebounded in 2016/17 but have come down from recent peaks – though they are still well above the trough in early 2016. Prices are set to consolidate in the near term for most other commodities but rise in the medium to longer term supporting Australian producers.

Employment growth gained momentum, pushing the unemployment rate down to 5.2%. Annual employment growth is now over 4%, on-trend with the bumper jobs growth seen at the national level over the same period. The employment participation rate has also gradually improved, reaching over 65.5% for the first time since February 2016, significantly improving the health of the labour market. — Australia’s annual GDP growth is forecast to remain around 2.5% for the next three years. GDP will be boosted by net exports, with solid growth in export volumes forecast. Underpinning this will be healthy global growth (which will drive demand for services exports), new Liquefied Natural Gas (LNG) capacity, and moderate growth in capacity in other key commodities.

Rural and manufacturing exports are also expected to contribute, with both sectors taking advantage of Australia’s comparative advantage in high quality, high value-added output.

The worst of the mining investment slump has now past and Queensland’s economy is forecast to slowly pick up over the next two to three years despite a downturn in residential construction. Growth in SFD, GSP and employment are all forecast to be similar to the national average over the next few years, although state economic growth will remain well below historical averages of over 4% per annum (for SFD and GSP). — Queensland’s economic growth (as measured by Gross State Product or GSP) slowed marginally in 2016/17 to 1.8% following 2.6% growth in 2015/16. This mild deceleration was driven by a slowdown in housing investment combined with the continued fall in nondwelling mining construction.

Yet these declines were offset by growth in exports as LNG production ramped up in conjunction with rising service credits (tourism). 12 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

  • While there is no shortage of commentary surrounding the risks inherent in global economic growth – ranging from the sustainability of Chinese growth and resilience of its financial system to the effect and impact of new trade sanctions – the fact remains that economic conditions on the ground have improved in the US and across Queensland’s major trading partners. World GDP growth was robust in calendar 2016 (reaching 3.2%) and growth accelerated to 3.7% through calendar 2017. Growth is being supported by rising manufacturing activity and global trade flows. Developed economies are leading the way for the first time in a decade. From 2019 onwards, the world economy is expected to slow somewhat, linking once again to long-term fundamentals (falling population growth and structurally slower productive gains), but it is still expected to average 3.5% per annum over the five years to 2022. Australia’s trading partner growth (weighted by export proportions) will grow at a faster rate of 3.8% over the next five years, due to the high weights of China, East Asia and India in Australia’s export mix. Although these economies will experience slower growth going forward, they are still expected to outpace the global average. In the US, business investment is forecast to accelerate, driven by improving domestic demand and export gains from a more competitive US dollar and a stronger global climate, rebounding energy sector activity and corporate tax cuts. Despite the rising risks, the global economy is still positive for Queensland Real GDP/GNP# Year Ended December OECD (1)(4) US Japan Euro area China India Other East Asia(3)(4) World GDP(4) 2008 0.2 -0.3 -1.1 0.4 9.6 6.2 7.7 3.0 2009 -3.5 -2.8 -5.4 -4.3 9.5 5.1 4.4 -0.5 2010 3.0 2.5 4.2 2.1 10.6 10.9 4.8 5.3 2011 2.0 1.6 -0.1 1.7 9.5 6.9 4.3 4.1 2012 1.4 2.2 1.5 -0.4 7.8 5.5 4.2 3.3 2013 1.5 1.7 2.0 0.3 7.8 6.2 3.8 3.4 2014 2.2 2.6 0.3 1.8 7.3 7.1 4.0 3.5 2015 2.5 2.9 1.4 2.2 6.9 7.5 4.5 3.2 2016 1.8 1.5 0.9 1.9 6.7 7.9 4.3 3.2 2017 2.5 2.3 1.8 2.4 6.9 6.2 4.2 3.7 Forecast 2018 2.5 2.8 1.7 2.2 6.4 7.5 4.1 3.9 2019 2.0 2.0 0.9 1.8 6.0 7.0 4.0 3.6 2020 1.6 1.5 0.0 1.6 5.7 6.9 4.0 3.5 2021 1.6 1.5 0.9 1.5 5.4 6.6 3.9 3.4 2022 1.6 1.5 0.9 1.4 5.2 6.4 3.8 3.3 Average Growth Rates 2003–2007 2.8 2.9 1.7 2.5 11.7 8.6 4.5 4.9 2008–2012 0.6 0.7 -0.2 -0.1 9.4 6.9 5.1 3.0 2013–2017 2.1 2.2 1.3 1.7 7.1 7.0 4.2 3.4 Forecast 2018–2022 1.9 1.9 0.9 1.7 5.7 6.9 4.0 3.5 2023–2027 1.5 1.6 0.5 1.2 4.7 6.2 3.6 3.3 (1)
  • Organisation for Economic Co-operation and Development: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.
  • (2)
  • Euro area: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Spain. (3) Other East Asia: Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam. (4) 2017 is an estimate. (5)
  • Trading partner countries include: China, Japan, Hong Kong, United States, New Zealand, India, Europe and Other East Asia. # Annual Per Cent Change. Figure 5 Economic Growth by Region and Country 13 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

The combination of solid increases in employment and improved (although still moderate) wage growth should drive higher household incomes, consumer spending and residential investment. Meanwhile, the Eurozone is expanding at the fastest pace in a decade. Firming domestic demand is driving the economy, with investment recovering and weaker inflation, strong consumer confidence and employment supporting household spending. The overall Eurozone unemployment rate is at a nine-year low. Japan is expected to benefit from ongoing monetary and fiscal stimulus, including a delay in a sales tax hike in response to ongoing weakness in private demand growth.

Meanwhile, China, while gradually slowing, is still the world’s largest economy and will continue to make significant contributions to global growth. India and ASEAN-5 (Indonesia, Philippines, Malaysia, Thailand and Vietnam) GDP growth is expected to pick up pace over the next two years while Russia and Brazil – currently in recession – are expected to recover from 2017 adding to world growth.

Further declines in bulk commodity prices are anticipated, before a longer term recovery, affecting Queensland royalty revenues (and impacting on the Australian dollar) After recording strong gains from supply side concerns, coking coal prices are forecast to fall over the next two years driven by both increased coking coal production in China and a return to average (normal) production levels in Australia. A sustained recovery is forecast from early next decade as global growth builds momentum against constrained supply, and as the path of development in emerging economies becomes more steel intensive.

For thermal coal, prices are still elevated, although a correction is expected over 2018 and 2019 as ‘one-off’ recent price drivers dissipate and markets come back to balance. A modest price recovery is forecast from next decade as demand is expected to outweigh supply.

Queensland – and Australia more broadly – continues to be well positioned to supply commodities A combination of geographical proximity to Asian demand centres, favourable policies, supporting infrastructure, being at the lower end of the cost curve for several commodities, and high quality / low impurity content of mineral endowments will all support future exports from Australia. This will help counter the negative effects of several mines reaching their end-of-life and the possibility of discovering lower quality ore body during exploration. However, lower prices for coal, if realised, present a risk to state government royalties.

To some extent however, the fall in commodity prices (combined with rising interest rates in the US) is also likely to keep the Australian dollar below recent highs, which will help offset lower US-dollar commodity prices – and also provide a boost to Queensland’s trade exposed industries. Figure 6 – Commodity Prices ($US) Quarterly Average Prices (Log Scale) Forecast Coking Coal (US$/t) Thermal Coal 9US$/t) Crude Oil (US$/t) Iron Ore (US$/t) Jun 90 Jun 94 Jun 98 Jun 02 Jun 06 Jun 10 Jun 14 Jun 18 Jun 20 Jun 16 Jun 12 Jun 08 Jun 04 Jun 00 Jun 96 Jun 92 10 20 40 80 160 320 Source: BIS Oxford Economics, BREE data 14 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Offsetting investment cycles keep the Australian economy subdued The Australian economy has strong fundamentals, now enjoying 27 years of uninterrupted growth since the 1990/91 recession. Population growth is among the highest of the developed economies, which has helped underpin household consumption and demand for dwelling and infrastructure construction. Government debt is comparatively low by global standards, with the Federal Government and the larger state economies of New South Wales and Victoria maintaining AAA credit ratings. Overall economic risks are low and the Australian economy is well situated in the fast growing Asia Pacific region.

Nevertheless, growth in GDP and particularly domestic demand has been lower over the past five years than the previous two decades. Source: BIS Oxford Economics, BREE data Figure 7 – Commodity Prices ($US) Quarterly Average Prices (Log Scale) Nickel Lead (x10) Gold (x10) (US$/oz) Copper 1,000 Jun 90 Jun 94 Jun 98 Jun 02 Jun 06 Jun 10 Jun 14 Jun 18 Forecast Zinc Aluminium Jun 92 Jun 96 Jun 00 Jun 04 Jun 08 Jun 12 Jun 16 Jun 20 2,000 4,000 8,000 16,000 32,000 The main factor dragging down growth has been a major decline in mining investment, which has coincided (and contributed to) weakness in nonmining business investment.

The shift in the Australian economy back to broad-based growth following the mining boom continues to progress slowly. Growth is still below trend–GDP growth has averaged around 2.5% annually over the last five years, with FY2017 coming in below that, at 2.1%. There are some positive signs. Net exports are contributing positively to demand, with the global upswing and a competitive Australian dollar (albeit recently flirting with US$0.80) helping to drive export volumes growth. But despite stronger profitability, non-mining business investment remains patchy, and with spare capacity still to absorb in the labour market, household income and consumer spending growth is forecast to remain below trend this year and next.

Overall, however, the Australian economy has been unable to sustain economic growth above 3% since the peaking of the resources investment cycle in 2012/13. Much of this weaker economic performance is due to very weak growth in domestic demand during the period, which has been negatively impacted by the ongoing decline in resources investment. While partially cushioned by a boom in residential investment since 2013/14 and, more recently, by a recovery in public infrastructure investment, economic growth has also been hampered by record low growth in wage incomes, with households spending more of what they earn and reducing savings to maintain just moderate household expenditure growth.

Weak wage growth has also driven weaker than budgeted tax revenues for governments, lengthening the time horizon required to return to sustainable budget surpluses, and limiting the firepower of governments to counter weak private investment with higher public investment without further increasing public debt. 15 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

Unlike many other resourcesexporting economies, Australia did not experience a recession in the wake of the resources investment bust. Strong growth in mining production and exports from world class, competitive deposits, and supercharged by a much lower dollar – which also stimulated other exports of goods and services, such as tourism, education services, agriculture, manufacturing and business services – has helped offset some of the pain from weaker demand growth. Economic growth (which includes net exports) has generally been higher than growth in domestic demand.

The challenge for Australia is that mining exports, particularly, are highly capital – rather than labour – intensive.

Stronger, sustainable growth in employment requires stronger growth in local expenditures; and in domestic demand. In turn, this requires the return of growth in non-mining business investment, which has remained stalled since the GFC. The problem for non-mining industry sectors has generally been weak growth in demand, weak profits and excess capacity. In that environment, it is foolhardy for businesses to invest ahead of requirements, straining cash flows and locking in additional costs before they had the revenue to support them. Most businesses are still in cost-cutting mode, preserving cash and deferring investment until demand recovers.

Low interest rates in this environment have had relatively little impact. While there have been plenty of funds available, this just hasn’t been the business environment for strong private investment. The next growth phase in the Australian economy will be driven by non-mining business investment. When it does recover, it will be to service growing demand, driven by a growth logic (evidenced by rising profits) and augmented by a technology catch-up. In turn, this will have a strong multiplier through business services into the rest of the economy. While non-mining business profits have increased, it is still too early to say that businesses are confident in the path of future demand and profits, and are willing to make the psychological shift from caution to a ‘go for growth’ investment mentality.

Part of the reason for this is that nationally, by region and industry, growth and profitability is highly fragmented. Very strong economic growth has returned to New South Wales and Victoria, after spending much of the mining boom years suppressed. But growth in demand is still very weak in many other regions. Some states such as Western Australia and Queensland saw outright declines in State Final Demand in recent years. There remain challenges ahead for the Australian economy that are likely to keep business confidence and investment on a weak plane over the next one to two years. Wage growth, except for skilled professions and trades in some sectors and states, is likely to remain relatively weak, affecting retail trade and household expenditures.

Politics is highly adversarial, with major political parties unable to forge a workable consensus on many important policy areas surrounding taxation, energy security, and the environment. But, more importantly, investment cycles across Australia are likely to remain highly unsynchronised over the next two years – keeping overall economic growth constrained to around 2.5% per annum on average over 2017/18 and 2018/19.

78% Mining construction will decline around from the 2013/14 peak to the trough 16 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Figure 8 Major Project Work Done by Segment -4 -2 2 4 6 8 Forecast Real GNE Real GDP External Contribution Year Ended June 2017 1989 1993 1997 2001 2005 2013 2009 Per cent 2015 2011 2007 2003 1999 1995 1991 2019 -2 -1 1 2 3 4 Forecast Private Consumption Government Expenditure New Business Investment Year Ended June Per cent Dwelling Investment 2017 1989 1993 1997 2001 2005 2013 2009 2015 2011 2007 2003 1999 1995 1991 2019 These unsynchronised investment cycles include: — Residential investment, a key driver of growth over the three years to 2015/16, which is expected to peak and then decline over the next three years, with particularly large declines expected in the volatile high density apartment market.

Mining investment nationally, which is in the final stages of decline as the LNG investment boom finally runs its course in Western Australia and the Northern Territory (having already wound down in Queensland). Overall, mining construction will decline around 78% from the 2013/14 peak to the trough, although mining equipment purchases and exploration have started to recover across most commodities (indicating the initial stages of the next upturn). — Public investment, which has finally started to recover after five years of decline, surging 16% in 2016/17 alone. Growth in public investment is being supported by new transport infrastructure but will be offset in part after 2018/19 by sharply falling investment in Australia’s largest public infrastructure project – the NBN.

Even considering a strong phase of growth in transport infrastructure, growth in total public investment is expected to be either flat or falling (and hence be a drag on Australia’s economic growth) by the end of the decade. — Non-mining business investment, which is currently showing only modest growth but is expected to strengthen from last decade as higher profitability, demand and capacity utilisation (in turn supported by a slightly weaker Australian dollar) drive a change in business confidence and investment.

Contribution to Domestic Demand – Percent 17 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

Domestic demand is predicted to improve late this decade as the expected declines in mining and residential investment bottom out and start showing signs of recovery. Capacity constraints and expected improvements in business confidence are predicted to drive an acceleration in non-mining business investment. But until that time, economic growth and inflation is expected to remain relatively subdued, with the Reserve Bank unlikely to be in a strong position to raise interest rates until 2019/20.

Differences in the timing and magnitude of investment cycles by region are creating large differences in economic performance (and construction activity) by state. Strong pipelines of infrastructure projects, relative undersupply in housing, higher population growth and private sector confidence to invest is driving a construction upswing in New South Wales and Victoria, which in turn is spilling over into broader industry growth.

By contrast, total investment and construction activity remains relatively flat (or falling) in the former resources boom states of Queensland and Western Australia. These states are now generating strong growth in mining production and exports as a direct consequence of the previous resources investment boom, boosting Gross State Product (GSP). However, growth in State Final Demand (SFD), the sum of household consumption, government consumption and investment – (both public and private) has been very weak or negative in recent years. This is important, as growth in SFD tends to be a greater driver of growth in employment and incomes than growth in (capitalintensive) mining exports.

Queensland’s economic challenge The end of the mining boom was always going to be a trying time for the Queensland economy. Economic growth weakened markedly from 2011/12 driven by falling mining and public investment. Growth in GSP averaged 4.4% per annum over the 10 years to 2009/10 then fell to average 2.5% per annum over the five years to 2014/15. Meanwhile, growth in SFD – a measure of domestic demand or spending in the local economy which is highly correlated with employment – slowed to just 0.9% in 2013/14 (compared to growth rates of between 5% to 9% during the boom years), and then fell 3.6% in 2014/15 and a further 1.2% in 2015/16.

Employment growth weakened in unison, with the unemployment rate averaging 5.9% over the five years to 2014/15 (compared to 4.5% over the five years to 2009/10). This weakness continued into 2015/16, and the first half of 2016/17, with monthly employment falling consecutively on more than three occasions over the period. More recently, however, the labour market has shown some strength with the annual employment growth rate rising above 4%.

Private engineering construction, which is dominated by resourcesrelated construction, peaked at $39 billion in 2013/14 and then plunged 68% over the next two years. There were also large declines in equipment purchases and exploration by the Queensland mining industry over the 2013/14 to 2015/16 period. Although mining and heavy industry construction decreased a further 10% in 2016/17, the smaller decline off a much smaller base of investment has delivered a smaller negative contribution to SFD. Meanwhile, the jump in coal prices and higher base metals prices over 2016/17 has seen coal mines in Queensland re-opened and increases in mining equipment purchases.

Yet in one important sense, the Queensland economy has been partially sheltered from the severity of the downturn in mining investment. Significant components of mining and mining-related investment and equipment were sourced from overseas, and were therefore classed as imports, detracting from GSP. As mining investment retreated, so did these imports. So, although the local economy did not receive all the benefits of the resources construction boom during the upswing, it conversely did not suffer the whole negative magnitude of the downturn. Mining now accounts for a falling share of total engineering construction.

At the 2013/14 peak, mining and heavy industry construction, pipelines construction and railways construction accounted for around 90% (or $35.9 billion of the total $39.2 billion) of privately funded engineering construction. Since then, resources-related engineering construction has simply plummeted. The void left by retreating miningrelated engineering construction is being partially offset by a recovery in public investment. After little growth in the previous three years, Government Consumption Expenditure (GCE) jumped over 5% in 2015/16 and 2016/17. Strong rises in education and health-related employment is contributing to the rise in GCE and the healthier total employment figures.

Higher levels of private dwelling investment helped offset declines in private engineering construction. The recent upswing in residential building followed a six-year decline (2007/08 to 2012/13), which occured at the same time that the mining boom was stimulating robust population growth from both interstate and overseas, resulting in an undersupply of housing. This undersupply has now been eliminated, with private dwelling investment growing at an average of 12% per annum over the three years to 2015/16 and peaking in 2016/17. There are vast differences in economic performance by state 18 2018 Queensland Major Projects Pipeline | Queensland Major Project Outlook

Figure 9 Total Construction Work Done by State (2015/16 Constant prices) 10,000 20,000 30,000 40,000 50,000 60,000 70,000 Forecast NSW VIC QLD NT WA TAS Year Ended June 1990 1998 2006 2014 2018 ACT SA 1994 2002 2010 2022 Figure 10 Comparisons of State (SFD) and National (GNE) Growth in Final Demand Year Ended June 2017 1987 1993 1999 2005 2011 -10% -5% 0% 5% 10% 15% Forecast AUS GNE WA SFD QLD SFD SA SFD 20% The Queensland economy is showing signs of recovery. The lower, postboom Australian dollar has helped boost tradeables such as tourism and educational exports, with manufacturing also likely to benefit over the forecast horizon.

Meanwhile, public investment has returned after a number of years of weakness. Public investment had been a drag on the Queensland economy for several years, having fallen by over a third over the six years to 2015/16 from the 2009/10 peak. Public nondwelling building had fallen to its lowest level since 1993/94 (in real terms). However, it is now bouncing back, led by education-related and other social and institutional buildings. Public engineering construction also picked up strongly over 2016/17 and further strong growth is predicted for 2017/18 and 2018/19, driven by roads, harbours, defence, water and telecommunications-related infrastructure.

Further modest rises are expected thereafter, with falling telecommunication construction – as the NBN roll-out winds down – moderating the overall increases. Queensland economy to pick from here, but growth likely to be constrained Source: BIS Oxford Economics, BREE data Year Ended June 2017 1987 1993 1999 2005 2011 -6% -4% -2% 0% 2% 4% 6% 8% 10% Forecast AUS GNE NSW SFD VIC SFD 19 Queensland Major Projects Outlook | 2018 Queensland Major Projects Pipeline

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